Raffi PailagianMBA, BSc, DipFP
Adviser / Managing Partner
Almost unbelievably, the last time there was a rate rise in Australia was November 2010, when the rate went from 4.5% to 4.75%. It’s been downhill since then. Which is great for borrowers, but not for people living off their investments, particularly retirees.
But as with almost everything, there will be winners and losers in this low interest environment.
In a low interest environment, the winners are absolutely those borrowing money. Whether it is a mortgage on a family home, or money to fund a business or investment property, record low interest rates mean lower repayments, freeing up cashflow in both household budgets and businesses.
In a previous article we talked about the importance of the Sequence of Returns. Which relates to the effect low returns experienced in early retirement have on your capital position.
Essentially, anyone retiring now will have a hard time avoiding eating into their capital, unless they have a significant portion of their money invested in high growth assets. Of course, the downside of high growth assets is that they are often high risk, not what you are typically looking for in retirement investments.
Whilst there is nothing that can be done about the RBA interest rates, there are some things you can do to reduce the impact of a low interest rate environment if you are dependent on interest for income, and to maximise the benefits if you are a borrower.
Look carefully at all your financial arrangements. Are you getting the lowest mortgage rate? Are you getting the best interest on your cash deposits? Be active, and don’t be afraid to ask for a better deal.
Think very carefully about your Risk Profile. Whilst you should never invest in a way that contradicts your level of risk sensitivity, think long and hard about whether taking a slightly less risk-averse position might help your returns without making you uncomfortable. And always remember to get professional advice.
Speaking of risk profiles, the share market is providing great returns right now. Whilst any investment in shares is more risky than cash (and let’s face it, almost everything is), there are always some relatively safe stocks that you can use to improve your income.
If you are concerned about the level of risk, check out our article on Modern Portfolio Theory and the Efficient Frontier, and of course, seek professional advice.
Investing in property, either directly, through a property trust, or a managed fund with a heavy investment in property, will boost your returns. There is often talk of the property bubble bursting, but particularly in Sydney, there is little chance of the market falling off a cliff the way cash rates have done. Again, always get professional advice for your particular circumstances.
If you have a mortgage and don’t have an offset account – get one. Your cash reserves are earning almost no interest right now, but in an offset account they can reduce the balance on which you are paying interest and the time it will take you to pay off your mortgage. Should you need the cash for any reason, it is still readily available to you.
If you have a mortgage and have been used to paying a certain amount each month, keep paying it. Even if the rates have gone down. This is another way to get that pesky mortgage paid off and own your home or investment property sooner.
The Reserve Bank of Australia have unequivocally flagged that interest rates will remain at this low level for the next three years at a minimum[i]. So if you were thinking that sometime in the not-too-distant future you might upgrade your home, or buy an investment property, now is the time to take a serious look at it.
If your financial circumstances allow, and you feel secure in your employment, having a guaranteed three years at low rates can allow you to buy with relative peace of mind. Yes, of course, get professional advice based on your personal circumstances.
If you need help navigating a successful path through this low interest environment, Manly Financial Services have the knowledge and experience to guide you in the right direction. If you would like to discuss how to improve your investment income, or any other aspect of financial planning, give us a call on (02) 9976 3388 or click below and we will be in touch shortly
Head Office: Suite 105-106, Level 1, 39 East Esplanade, Manly NSW 2095
Manly Financial Services Pty Ltd is a Corporate Authorised Representative (Representative No.: 321127) ABN 38 115 806 883 of Futuro Financial Services Pty Ltd, Australian Financial Services Licensee (AFSL 238478)
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